• Alex Pettee, CFA

Inflation Week • REITs Lead • Commodity Rally

Summary

  • U.S. equity markets finished lower in a choppy Monday session as soaring commodities prices have put cost concerns back into the spotlight ahead of a busy week of inflation data.

  • Following gains of 0.8% last week, the S&P 500 slipped 0.7% today while the Mid-Cap 400 finished lower by 0.5% and the Small-Cap 600 declined 0.9%.

  • Real estate equities were among the leaders today - led by resurgent timber REITs - as the Equity REIT Index gained 0.3% today with 15-of-19 property sectors in positive territory.

  • Healthcare Trust of America (HTA) continued its rally today after announcing that it has been in discussions with activist firm Elliott Management, which has urged the firm to put itself up for sale.

  • We have another busy slate of economic data in the week ahead, headlined by inflation data with CPI data on Wednesday and PPI on Thursday. We'll also see Retail Sales data on Friday.

Real Estate Daily Recap

U.S. equity markets finished lower in a choppy Monday session as commodities prices continued to soar, putting cost pressures back into the spotlight ahead of a busy week of inflation data and the start of Q3 earnings season. Following gains of 0.8% last week, the S&P 500 slipped 0.7% today while the Mid-Cap 400 finished lower by 0.5% and the Small-Cap 600 declined 0.9%. Real estate equities were among the leaders today - led by residential real estate sectors - as the Equity REIT Index gained 0.3% today with 15-of-19 property sectors in positive territory while Mortgage REITs gained 0.1%.

As discussed in our Real Estate Weekly Outlook, evidence of a persistent labor shortage in the September jobs report - along with an intensifying energy crunch across the globe - has sent inflation expectations and interest rates to their highest levels since early June. Crude Oil (CL1:COM) prices closed above $80/barrel for the first time since late 2014 while Natural Gas. Timber REITs led the Hoya Capital Housing Index today as lumber prices are staging a late-season rally, indicating that home construction activity may again be reaccelerating following a late-summer cool down.

We have another busy slate of economic data in the week ahead, kicking off on Tuesday with the JOLTs Job Openings report for August, which is expected to set another new record high as employers continue to struggle to find workers. On Wednesday, we'll see the critical Consumer Price Index data for Wednesday which is expected to show that consumer inflation remained above 5% in September. The Producer Price Index on Thursday, meanwhile, is expected to show that producer costs rose nearly 9% for the month. Finally, on Friday, we'll see Retail Sales data for September which is expected to show a moderation in spending and we'll get the first look at October Consumer Sentiment data following a historic plunge last month.

Equity REITs

Healthcare: Healthcare Trust of America (HTA) was higher today after it issued a statement in response to a letter last week by activist investor Elliott Investment in which it urged the company to put itself up for sale. HTA stated today that it "held several discussions with representatives of Elliott to better understand their views, and those views were immediately shared with the full HTA Board." Last Friday, we published Healthcare REITs: Safe & Effective which discussed how the "fourth wave" of the COVID pandemic has pressured Healthcare REITs over the past quarter. Senior Housing REITs - the hardest-hit sub-sector - were leading the recovery as occupancy rates appear to have bottomed in early 2021, benefiting from the red-hot and undersupplied housing market. Staffing shortages have become critical issues at skilled nursing facilities, however, worsened by recent vaccine mandates.

Storage: This evening, we'll publish our updated Storage REIT report which will analyze recent developments and preview third quarter earnings which will begin next week. Storage REITs have risen like a phoenix from the ashes over the last year, delivering stellar results in the second quarter while leading indicators suggest Q3 results will be similarly strong. The Producer Price Index for self-storage facilities - which has historically exhibited a near-perfect correlation with same-store revenue growth metrics - showed a continued reacceleration through the end of Q3. The most recent August PPI report showed the strongest year-over-year rise in self-storage rents on record.

Mortgage REITs

Per our Mortgage REIT Tracker, residential mREITs gained 0.4% following gains of 1.0% last week. Commercial mREITs slipped 0.1% today after declining by 0.1% last week. New Residential Investment (NRZ) was higher today after it announced that it will acquire real estate lender Genesis Capital LLC, a business purpose lender to real estate developers, and a related portfolio of loans from affiliates of Goldman Sachs (GS). Genesis is expected to originate ~$2B of loans in 2021 and has originated more than 12,000 loans since 2014. NRZ plans to finance the acquisition - which should close by the end of this year - with existing cash and committed asset-based financing from Goldman, and Genesis will operate as an independent subsidiary of NRZ.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.02% today, on average, but have produced total returns this year of roughly 15%. Over in the bond markets last Friday, Realty Income (O) announced a series of exchange offers for notes issued by Vereit (VER) as part of its merger, which is expected to close by the end of the year. Also last Friday, Corporate Office's (OFC) BBB- long-term issuer credit rating was affirmed by Fitch while Alexandria Realty's (ARE) BBB+ credit rating was affirmed by S&P, which also revised ARE's outlook to positive from stable.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

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